The absolute litigation privilege is a long-standing legal principle that statements made during the course of a judicial proceeding by participants in the proceeding (whether parties, attorneys, witnesses, or judges) are absolutely privileged, protecting the speaker from subsequent claims of defamation or libel arising out of those statements.
The public policy objective behind the privilege is fairly straightforward. Parties to an action should be free to litigate their case—whether zealously prosecuting their claims or vigorously defending against an adversary’s claims—without fear that statements made during litigation will open them up to future claims for defamation. A recursive loop of litigation (i.e. suing you because of what you said when you sued me) serves no one, least of all the courts.
As such, the privilege is a broad one. When applied, it offers a complete defense regardless of the truthful of the statement, even where the statement was made with malice or ill-intent.
But, broadly applied does not mean blindly applied. The application of the privilege to contract claims is a question courts have only recently started to wrestle with.
Today’s post concerns a decision out of the Delaware Chancery Court, in which the Court was tasked with determining whether the absolute litigation privilege bars the exercise of a contractual repurchase option triggered by claimed disparaging statements made in a prior litigation.
In Sevatec Holdings Inc. v Octo Platform Equity Holdings, LLC, C.A. No. 2022-0437-PRW, the Court held that, no, the absolute litigation privilege “has no bearing on the validity of the repurchase.”
The Business
Sevatec, LLC, founded in 2003 by Sonny Kakar, was a technology services firm that provided a variety of design, development, security and operations, as well as cloud service and data integration services to federal agencies. Over the years, it steadily grew from a small business into a solid mid-tier federal IT service provider.
Octo Consulting Group, LLC, founded in 2006, operated in a similar market, providing technology and IT modernization services to federal agencies.
At the time of the November 2020 merger, both companies were ready to expand, with certain synergies between them that would serve the combined business well. In fact, just 2 years later, in December 2022, IBM purchased the business.
The Contracts
Operating under parent company Octo Platform Equity Holdings, LLC (i.e. the defendant in this action), Kakar was to join the business as Head of Strategy and Vice Chair of the Board. Kakar also received shares in the company through a holding company, Sevatec Holdings, Inc. (i.e. the plaintiff here).
Kakar had an executive employment agreement that included a commitment not to “publish or communication” any “disparaging” statements about Octo. Such “disparaging” remarks include: “those intended to impugn the character, honesty, integrity, reputation” or “business abilities in connection with any aspect of the operation of business of the individual or entity being disparaged.”
Octo’s contractual right of repurchase, governed by a side-letter agreement and the company’s operating agreement, could be triggered by: “a material breach by Mr. Kakar of any of the restrictive covenants with respect to confidentiality… non-competition, non-solicitation, non-interference or non-disparagement obligations in either his [Employment Agreement] or his Non-Competition Agreement.”
The Dispute
Though Octo announced its successful integration of the Sevatec businesses in April 2021, behind the scenes, there was trouble in paradise. The parties unsurprisingly point the finger at each other for the breakdown in the relationship. Whatever the reason, the relationship rapidly unraveled a mere 9-months into the merger:
- In August 2021, Octo issued a notice of for-cause termination and removal to Kakar.
- On January 14, 2022, Kakar sued Octo for defamation in Virginia state court based on the issuance of the termination notice. On the same day, Kakar simultaneously commenced an action in Delaware Superior Court asserting a number of business tort claims for fraudulent inducement and breaches of the transaction documents, among others.
- On February 14, 2022, Octo sent Kakar a repurchase notice exercising its option to repurchase Kakar’s shares triggered by the “publicly filed” complaints containing allegedly defamatory statements in violation of Kakar’s non-disparagement obligations.
- In March 2022, Kakar commenced the 3rd action between the two camps in as many months, this time in the Delaware Court of Chancery, chiefly challenging Octo’s right to repurchase and claiming deficiencies in its exercise thereof.
After whittling down the various claims and counterclaims, the two Delaware cases were consolidated, and the parties cross-moved for partial summary judgment.
An Inherent Tension Between a Freedom to Litigate and a Freedom to Contract
Delaware Superior Court Judge Paul R. Wallace, sitting by designation, determined from the outset that the “bulk of this consolidated action will proceed to trial,” but that “in an attempt to clear the legal underbrush,” the Court’s analysis would focus on the repurchase.
The Court identified the three Delaware cases that discuss the applicability of the absolute litigation privilege’s protection to contractual claims, and highlighted the tension that exists “in balancing the public policy interest of encouraging the freedom of a person to pursue one’s claims in court and that of upholding the freedom of contract”:
- Ritchie CT Opps, LLC v Huizenga Managers Fund LLC (2019): Plaintiffs sought to enjoin defendants from making allegedly disparaging statements in other lawsuits defendants commenced. The court, in applying the privilege, denied the injunction as it would not “vindicate” the parties’ contractual rights, but would instead, “render contract rights effectively unenforceable.”
- Sheehan v Assured Partners, Inc. (2020): Seller sold his business and entered into an employment agreement with the purchaser, including reciprocal non-disparagement obligations. After the closing, the buyer discovered alleged fraud and sued the seller. Seller, then, sued the buyer for breach of the non-disparagement clause. The court applied the privilege, barring the seller’s breach of non-disparagement claim, “because of the risk of ‘chilling litigation’ and creating an unending cycle of side-litigation.”
- Feenix Payment Sys, LLC v Blum (2022): Defendant asserted the absolute privilege to defamation and contract-based claims based on allegedly defamatory statements in his pre-litigation letter. The Court declined to apply the privilege, holding that the application of the privilege would “undermine” the parties’ freedom of contract, as the defendant was a “sophisticated party who consented to the non-disparagement and confidential provisions” and should therefore be held “to the obligations he decided to assume.”
In Delaware, Contractarianism Reigns Supreme
The arguments on both sides are compelling.
Octo relied on Feenix to argue that the litigation privilege does not relieve Kakar of his contractual obligations, as extensively negotiated and agreed to. Unlike in Ritchie CT Opps and Sheehan, Octo is not seeking an injunction or asserting a defamation claim, nor it is otherwise looking to control Kakar’s litigation strategy. Instead, Octo seeks only to enforce its contractual right to exercise its repurchase option triggered by Kakar’s disparaging statements, albeit made in the context of litigation.
On the other hand, and relying on Ritchie CT Opps and Sheehan, Kakar argued that enforcing the repurchase option would violate the absolute litigation privilege because it would impermissibly chill Kakar’s litigation against Octo. Since the privilege bars Octo from outright asserting defamation and contractual non-disparagement causes of action against Kakar based on the Virginia and Delaware complaints, the privilege should also bar triggering Octo’s repurchase option based on those same claimed disparaging statements.
The Court sided with Octo, holding: “Seva’s request finds no support in Delaware’s contractarian regime.”
The Court acknowledged the tension between the freedom to litigate and the freedom to contract, both of which have strong public policy behind it. While the privilege bars contractual non-disparagement claims, the Court declined to extend it one step further, “to expand the scope of the absolute litigation privilege as a means to nullify the repurchase of a member’s interest in a Delaware limited liability company,” a proposition the Court found had no support in Delaware.
The “specter of potentially chilling litigation by enforcing the Repurchase Option” was, in the Court’s eyes, weaker in comparison to the precedent cases, in that Kakar “is free to continue litigating his claims.” In other words, the Court held Kakar to the consequences of his choice to litigate, relying on Delaware’s “maximum freedom in allowing parties to order their governance arrangements.”
Lingering Questions
But isn’t there a chilling effect on litigation, though?
While I don’t disagree with the Court that the absolute litigation privilege should not be wielded as a sword—or rather, a pen—to effectively change the terms of extensively negotiated agreements between highly sophisticated parties (and their army of lawyers), there is something… unsettling about the Court characterizing the repurchase as a “collateral effect” of Kakar’s decision to litigate his claims against Octo.
It seems a little harsh forcing a litigant to choose between keeping their claims but losing their shares, or vice versa. Aside from the obvious financial impact of losing shares in a successful company, what if Kakar had asserted derivative claims? Wouldn’t Octo’s exercise of the repurchase option destroy the shareholder standing required to maintain those claims?
I suppose the appropriate response is an exhortation that clients and their counsel carefully read and consider buy-sell or repurchase clauses contained in any governing agreement, particularly with respect to the triggers, as we have cautioned on this blog time and time again.
That the 3 Delaware cases cited were issued within the last 5 years points to an emerging application of an ancient doctrine to keep an eye on.
What about New York?
New York case law is even more sparse on the topic. Although we’ve covered the absolute litigation privilege once before on this blog (see Frank McRobert’s post here), the only case coming close to a similar fact pattern as Sevatec that I came across was TRB Acquisitions LLC v Yedid, 215 AD3d 40 [1st Dept 2023], where the First Department reinstated plaintiffs’ claim for breach of a confidentiality and non-disparagement agreement as improperly dismissed. But there, in declining to apply the absolute litigation privilege, the First Department relied on an exception to the privilege (as opposed to relying on freedom of contract principles), finding: “An extortion attempt by threatening to provide false testimony in a separate action if his demand in the arbitration was not accepted and, following rejection, affirmatively reaching out to plaintiffs’ adversaries in the separate Reebok litigation, indeed offering to provide false testimony in that action—is a course of conduct for which the protection afforded by an absolute privilege is appropriately withdrawn.”
But, in Gottwald v Sebert, 40 NY3d 240, 253 [2023], issued just a few months after the TRB decision, the New York Court of Appeals addressed a line of cases standing for the proposition that the absolute litigation privilege may be “lost if abused,” and abrogated those cases. Specifically, the Court of Appeals held that the “sham exception” to the absolute litigation privilege is “inconsistent with the absolute privilege recognized by this Court for statements made in connection with judicial proceedings.”
How New York Courts address this going forward has yet to be seen, as there have not been any cases testing the application of exceptions to the privilege since Gottwald. Given the above, I’m just not sure how a New York court would decide a case like Sevatec today.
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